STULL, STULL & BRODY
EDWARD P. DIETRICH (176118)
MICHAEL D. BRAUN (167416)
10940 Wilshire Blvd.
Suite 2300
Los Angeles, CA 90024
Telephone: 310/209-2468

STULL, STULL & BRODY
JULES BRODY
EDUARD KORSINSKY
6 East 45th Street
4th Floor
New York, NY 10017
Telephone: 212/687-7230

Attorneys for Plaintiff

[Additional counsel appear on signature page.]

Plaintiff, by his attorneys, for his Class Action Complaint (the "Complaint") allege the following upon personal knowledge as to himself and his own acts, and upon information and belief based upon the investigation of plaintiff's attorneys as to all other matters. The investigation includes the thorough review and analysis of public statements, Rational Software Corporation's ("Rational" or the "Company") SEC filings as well as publicly-filed documents relating to Rational, press releases, news articles and the review and analysis of accounting rules and related literature. Plaintiff believes that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.

1. This is a securities class action on behalf of public investors who purchased the common stock of Rational from the commencement of trading of Rational securities on the NASDAQ securities market on Wednesday, October 8, 1997 through the sudden announcement of a trading halt in Rational securities at 2:18 p.m. EDT on Wednesday, October 8, 1997 (the "Class Period"). Plaintiff complains of defendants' dissemination of material inside information regarding Rational's business prospects on a selective and discriminatory basis. Plaintiff alleges that during the course of the day of October 8, 1997, Rational provided material inside information to Cowen & Company, Inc. ("Cowen"). Based on that information, Cowen informed certain clients who then sold or lightened their position in Rational, prior to full and proper disclosure of such information on a widespread basis to the investing public. Only at approximately 4:39 p.m. EDT did Rational disseminate to the investing public what it had already improperly provided to Cowen earlier in the day. In a release via the PR Newswire Service, Rational stated that "[b]ased on the company's current operating plan and anticipated increases in competition, the company believes that revenue growth and EPS for FY99 will be lower than current analyst published estimates."

2. Plaintiff seeks damages from Rational and Cowen as a result of the conduct alleged herein. The Complaint will be amended to add, as defendants, the tippees who traded on the information provided by Rational to Cowen before the uniform widespread release of the information to the market.

3. This Court has jurisdiction over this action pursuant to §27 of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §78aa, and 28 U.S.C. §§1331 and 1337. The claims asserted herein arise under §§10(b) and 20A of the 1934 Act, 15 U.S.C. §§78j(b) and 78t-1, and Rule 10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder by the SEC.

4. (a) Venue is proper in this District pursuant to §27 of the 1934 Act, 15 U.S.C. §78aa, and 28 U.S.C. §1391(b). Many of the defendants reside in this District. Many of the acts giving rise to the violations complained of, including the dissemination of false and misleading public statements and financial information, occurred in this District.

(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.

5. In connection with the wrongs alleged herein, defendants used the instrumentalities of interstate commerce, including the United States mails, interstate wire and telephone facilities, and the facilities of the national securities markets.

6. Plaintiff Velvel Sachs purchased shares of Rational common stock during the Class Period and was damaged thereby, as set forth in the Certification attached hereto.

7. Defendant Rational Software Corporation is a Delaware corporation with headquarters at 2800 San Tomas Expressway, Santa Clara, California 95051. Rational develops, markets and supports a comprehensive solution that automates the component-based development of software. Rational common stock listed and actively traded on the NASDAQ National Market System ("NASDAQ"), an efficient system.

8. Defendant Paul D. Levy ("Levy") is, and was at all relevant times, the Chief Executive Officer of defendant Rational.

9. Defendant Robert T. Bond ("Bond") is, and was at all relevant times, the Chief Operating Officer and Chief Financial Officer of defendant Rational.

10. By virtue of their positions as officers and/or directors of the Company, the defendants named in ¶¶8-9 above (the "Individual Defendants") had the authority and ability to, and in fact did, control the contents of the Company's annual and quarterly reports filed with the SEC, and press releases. Further, the actions of the Individual Defendants during the Class Period caused the Company's financial condition, and results as alleged herein, to be materially overstated. The Individual Defendants were aware of adverse information regarding the results of the Company's operations, but failed to disclose such information on a timely, non-discriminatory basis in violation of Rule 10(b)-5 of the federal securities laws.

11. Defendant Cowen & Company, Inc. ("Cowen") is, and was at all relevant times, a large institutional securities brokerage firm. Cowen proclaims that it is one of the ten largest institutional market makers in technology stocks.

12. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, individually and on behalf of all other persons or entities who purchased or acquired Rational during the Class Period and were damaged thereby (the "Class"). Excluded from the Class are the defendants, members of their families, their affiliates and any officers or directors of Rational or their affiliates.

13. The Class is so numerous that joinder of all the members of the Class is impracticable. Plaintiff believes there are hundreds of holders of record of the Company's common stock located throughout the United States.

14. Plaintiff's claims are typical of the claims of absent Class members. Members of the Class have sustained damages arising out of defendants' wrongful conduct in violation of the federal securities laws in the same way as the plaintiff has sustained damages from the unlawful conduct.

15. Plaintiff will fairly and adequately protect the interests of the Class. He has retained counsel competent and experienced in class and securities litigation.

16. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. The Class is numerous and geographically dispersed. It would be impracticable for each member of the Class to bring a separate action. Individual damages of any member of the Class may be relatively small when measured against the potential costs of bringing this action, and thus make the expense and burden of this litigation unjustifiable for individual actions. In this class action, the Court can determine the rights of all members of the Class with judicial economy. Plaintiff does not anticipate any difficulty in the management of this suit as a class action.

17. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting individual members of the Class. These questions include, but are not limited to, the following:

(a) whether defendants' conduct, as alleged herein, violated the federal securities laws;

(b) whether defendants wrongfully disseminated material non-public information to Cowen prior to the release of that information to the market;

(c) whether the members of the Class have been damaged, and if so, what is the proper measure of damages.

18. On October 8, 1997, at approximately 9:28 a.m. EDT, Rational's trading on the NASDAQ began uneventfully. The bid for Rational opened at $15-1/16. As of 11:00 a.m. EDT the ask was $14. Between 11:00 a.m. and 11:43 a.m. EDT, the ask on Rational declined to $12-15/16. By 11:50 a.m. EDT the ask on Rational had declined to $11-15/16.

19. During the foregoing period, there was no news pending on any wire service, Dow Jones, or Reuters which gave any explanation for the sudden decline in Rational's stock price. At approximately 12:03 p.m. EDT, Dow Jones News Service reported that Rational was down on heavy volume.

20. At 2:03 p.m. EDT Dow Jones News Service reported the following headline:

21. Plaintiff alleges, based upon his investigation, that during the course of the day, October 8, 1997, but prior to its widespread public disclosure, Rational provided Cowen with material inside information, including that it had achieved lower than expected earnings.

22. Plaintiff alleges, based upon his investigation, that during the course of the day, October 8, 1997, but prior to Rational's widespread public disclosure of their announcement of lower than expected earnings, Cowen told certain clients, who are not ascertainable at this time, to dump their positions or lighten their positions in Rational.

23. Between approximately 9:28 a.m. EDT and 10:03 a.m. EDT, there were no large block trades in an amount equal to or exceeding 10,000 shares per trade reported on the NASDAQ. Between 10:03 a.m. EDT and throughout the course of the day, while there was no pending news available to the public market, a substantial number of large block trades were executed. For instance, at 10:22 a.m. EDT, three large block trades consisting of 35,000, 31,500 and 50,000 shares were reported to the NASDAQ. At 11:06 a.m. EDT, a 100,000 share block was reported to the NASDAQ. During the minute of 11:08 a.m. EDT, two large block trades were reported to the NASDAQ. During the minute of 11:09 EDT, seven large block trades were reported to the NASDAQ. At 11:10 a.m. EDT, a 115,000 share block trade was reported; at 11:13 a.m. EDT, a 76,900 share block trade was reported; at 11:15 a.m. EDT, a 75,000 share block trade was reported to the NASDAQ. Plaintiff alleges that certain of these trades were transacted by Cowen clients who were provided non-public inside information.

24. At 2:18 p.m. EDT, a trading halt was instituted by NASDAQ, presumably at the request of Rational.

25. At 2:42 p.m. EDT, Dow Jones News Service released the following text:

NEW YORK (Dow Jones) -- Rational Software Corp. tumbled 19% Wednesday as the company advised analysts to lower revenue growth expectations for fiscal year ending March 1998 and fiscal 1999, according to Cowen & Co. analyst Rehan Syed.

Syed said Rational management told him that the company is not expecting to see its revenue rise as fast as analysts had estimated on account of "additional competitive pressures."

The company didn't issue exact figures for what it expects revenue growth to be. Rational officials weren't immediately available for comment.

Rational management cited Oracle Corp.'s (ORCL) anticipated entry this year in the visual-modeling software market, one of Rational's core product areas as one of the additional competitive pressures, Syed said.

26. At 4:19 p.m. EDT, Dow Jones News Service announced:

Rational is expected to hold a conference call at 4:30 p.m. EDT Wednesday, analysts said.

In addition to the competitive threat from Oracle, Rational faces another challenger in Mercury Interactive Corp. (MERQ) for load-testing software in client/server environments, Deutsche Morgan Grenfell Inc. analyst Wendell H. Laidley said.

In the near-term, Rational also needs to invest more heavily in products targeted for Microsoft Corp.'s (MSFT) Windows NT operating system, Laidley said. Rational has been transitioning its products from the UNIX to the NT platform.

27. During the course of the conference call, defendant Levy made the following statements:

Rational Strategy: To focus on software components, to focus on the enterprise customer is right on target. We are now far enough into detailed operational planning for fiscal 1999 that we have sufficient insight to warrant or create the need for providing an update to current published estimates. Now our intent had been to couple this update with the conference call scheduled next wednesday for reviewing September results, however, the Oracle announcement of several weeks ago has led us to accelerate our schedule and conclude that today's special call would present the appropriate forum for discussing revised estimates. The first point that I would like to make is that we have taken the decision inside the company based on a very detailed bottoms up planning process review of our business to make the investments necessary to execute Rational's strategy to capitalize on the broad market opportunity our components represent. Increasing investment levels in product development, in marketing, in our sales channel will result in a reduction in earnings estimates for the remainder of fiscal 1988 [sic] and fiscal 1999. (Emphasis added.)

28. Plaintiff alleges that the foregoing information was revealed to Cowen earlier in the day, leading to an insider trading-based stock drop, rather than through the appropriate public disclosure. Defendants Rational, Levy and Bond recklessly failed to disseminate the foregoing information on a timely, widespread, non-discriminatory basis as required by law.

29. At 4:39 p.m. EDT, the following announcement appeared on the PR Newswire:

CUPERTINO, Calif. Oct. 8/PRNewswire/ -- Rational Software Corporation (Nasdaq: RATL) will announce its 2Q98 earnings on Wednesday October 15, as scheduled. Revenue for 2Q98 will be in line with current published analysts estimates and the company will report a net loss, as previously announced, that is primarily associated with the acquisition of Pure Atria Corporation. Looking forward to the remainder of FY98, management believes that, while revenue will be generally in line with or slightly below published analysts' estimates, EPS will be somewhat lower due to increased expenses in R&D, sales, and marketing to address the increasingly competitive nature of the markets that the company serves. Based on the company's current operating plan and anticipated increases in competition, the company believes that revenue growth and EPS for FY99 will be lower than current analyst published estimates.

30. At 5:00 p.m. EDT, the Dow Jones News Service announced:

CUPERTINO, Calif. (Dow Jones) -- Rational Software Corp. (RATL) will report a second-quarter loss due to its acquisition of Pure Atria Corp., and revenues for the quarter will match analysts' expectations.

In a press release Wednesday, the company said that for the rest of the fiscal year, revenue will be in line or slightly below analysts' estimates, while earnings will be "somewhat lower" due to increased expenses in research and development, sales and marketing.

Rational Software also expects revenue and earnings in 1999 to miss analysts' expectations.

A First Call consensus of 11 analysts estimated the company would earn 15¢ a share in the second quarter and 55 cents a share in fiscal 1998. For fiscal 1999, a consensus of 10 analysts estimated the company would earn 82 cents a share.

For the year ended March 31, 1997, Rational Software lost 98 cents a share, including charges, on revenues of $145.4 million. In the second quarter, the company earned 13 cents a share on revenues of $28.6 million.

31. According to Dow Jones News Service, Rational traded 11,405,000 shares on October 8, 1997 and the stock price of Rational declined $2-7/8, a decline of 19.4%. Subsequent to the conference call, numerous analysts downgraded Rational stock. On October 9, 1997, Rational, according to The Wall Street Journal, traded over 36 million shares and declined by $2, a loss of approximately 16%.

32. The market's reaction to the dissemination of Rational's release demonstrates the materiality of the foregoing information. The Individual Defendants knew or should have known of the anticipated reaction of the market and that the selective dissemination of such information to a market analyst constituted a violation of the federal securities laws. The failure to disclose such information on a timely, non-discriminatory basis constitutes a violation of Rule 10(b)-5 of the federal securities laws.

33. Plaintiff repeats and realleges each and every allegation contained in ¶¶1-32 above as if fully set forth herein.

34. At all relevant times, the defendants, individually and in concert, directly and indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct whereby they knowingly and/or recklessly made and/or failed to correct public representations which were or had become materially false and misleading regarding Rational's financial results and operations.

35. Defendant Rational is a direct participant in the wrongs complained of herein. The Individual Defendants are liable as direct participants in, and as controlling persons of, the wrongs complained of herein. By virtue of their positions of control and authority as officers and directors of Rational, the Individual Defendants were able to and did, directly or indirectly, control the contents of the aforesaid statements relating to the Company, and/or the failure to correct those statements in a timely fashion once they knew or were reckless in not knowing that those statements were no longer true or accurate. The Individual Defendants knew or should have known of the anticipated reaction of the market and that the selective dissemination of such information to a market analyst constituted a violation of the federal securities laws. The failure to disclose such information on a timely, non-discriminatory basis constitutes a violation of Rule 10(b)-5 of the federal securities laws.

36. Had plaintiff and the members of the Class known of the materially adverse information not disclosed by the defendants, but known to Cowen, among others, they would not have purchased Rational common stock at all or not at the inflated prices paid.

37. By virtue of the foregoing, defendants have violated §10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder.

VIOLATION OF SECTION 20A OF THE 1934 ACT AGAINST ALL DEFENDANTS

38. Plaintiff repeats and realleges each and every allegation contained in ¶¶1-37 above as if fully set forth herein, except for those alleging fraud.

39. This count is asserted against the all defendants and is based upon §20A of the 1934 Act.

40. Defendant Rational, through its officers, and defendant Cowen, through its analyst, disseminated material non-public information to individuals who sold shares in the possession of such information, and are liable, jointly and severally, for the losses avoided by the tippees who utilized such information.

41. By virtue of the conduct alleged herein, the Individual Defendants are liable for the aforesaid wrongful conduct and are liable to plaintiff and the Class for damages suffered.

WHEREFORE, plaintiff demands judgment as follows:

1. Determining that the instant action is a proper class action maintainable under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages and/or rescission as appropriate against defendants, in favor of plaintiff and all members of the Class for damages sustained as a result of defendants' wrongdoing;

3. Awarding plaintiff and members of the Class the costs and disbursements of this suit, including reasonable attorneys', accountants' and experts' fees; and

4. Awarding such other and further relief as the Court may deem just and proper.

COMPLNTS\RATIONAL.CPT

Source: Milberg Weiss web site